Also in WSJ.com:

Markets Pulse

UBS Admits Rigging Rates in ‘Epic’ Plot

By David Enrich, Jean Eaglesham

U.S., U.K. and Swiss authorities alleged a vast conspiracy led by UBS AG to rig interest rates tied to trillions of dollars in loans and other financial products, indicating the practice was far more pervasive than previously known.

UBS agreed to pay about $1.5 billion to settle charges against the Swiss bank, and a unit in Japan where much of the wrongdoing occurred pleaded guilty to criminal fraud. U.S. prosecutors also filed criminal conspiracy charges against two former UBS traders allegedly at the heart of the scheme.

UBS acknowledged the regulators’ charges. “We are taking responsibility for what happened,” UBS Chief Executive Sergio Ermotti said in an interview. He said all employees with any connection to the scandal have left UBS, including 36 over the past year. As a result of the fine, the bank expects to report a loss for the fourth quarter of up to 2.5 billion Swiss francs ($2.7 billion).

Regulators described the alleged illegality as “epic in scale,” with dozens of traders and managers in a UBS-led ring of banks and brokers conspiring to skew interest rates to make money on trades. The six-year effort “seriously compromised” the integrity of financial markets, said the U.S. Commodity Futures Trading Commission.

Traders openly boasted to each other about their prowess at moving the influential rates up or down at their whims. “Think of me when yur on yur yacht in Monaco,” one broker said in an electronic chat in 2009 with the UBS trader at the center of the alleged conspiracy, according to the Justice Department. The broker congratulated the trader on “getting bloody good” at rate-rigging, regulators said.

The ringleader, who wasn’t named in the settlement documents, was 33-year-old Thomas Hayes, according to people familiar with the investigation. Mr. Hayes was charged separately by U.S. prosecutors Wednesday, along with another former UBS trader, 41-year-old Swiss national Roger Darin. Neither Mr. Hayes nor Mr. Darin could be reached for comment Wednesday.

Mr. Hayes, a star trader who made nearly $260 million for the Swiss bank in the three years he worked there between 2006 and 2009, was open about his rate-rigging, prosecutors said. Libor “is too high cause I have kept it artificially high,” he allegedly boasted in an electronic chat in 2007.

UBS isn’t facing criminal charges. Justice Department officials said they decided not to charge the Zurich-based company, fearing such a move could endanger its stability.

The settlement is a landmark moment in a sprawling regulatory probe that began more than four years ago after The Wall Street Journal published an article questioning the credibility of Libor.

“Great article in the WSJ today about the Libor problems,” a UBS manager wrote to a trader, according to the U.K. Financial Services Authority. Two hours later, the regulator said, the manager asked the trader to boost the bank’s Libor submissions in an apparent effort to rig the rate.

The scandal over attempted manipulation of Libor and other rate benchmarks, which determine everything from the values of complex derivatives to the monthly interest rates many people pay on their mortgages, has been brewing for years. A $450 million settlement over Libor-rigging at Barclays PLC last summer led to the ouster of the bank’s chairman and chief executive.

Wednesday’s deal with UBS paints a picture of wrongdoing that was more widespread. That is one reason the penalty is more than three times the size of Barclays’s.

The settlement could signal large settlements at other banks still under investigation. The deal also is valuable ammunition for dozens of lawsuits filed in U.S. courts against banks by aggrieved customers, investors and others, seeking billions of dollars for alleged Libor manipulation.

Fannie Mae and Freddie Mac, the two U.S. mortgage giants, might have lost more than $3 billion as a result of banks’ alleged Libor manipulation, according to an internal report by a federal watchdog that was reviewed by the Journal. The unpublished report from the inspector general for the Federal Housing Finance Agency urges Fannie and Freddie to consider suing the banks involved in setting Libor.

UBS’s attempts to rig the rates mean that every version of Libor and other benchmarks in which UBS was involved “is at risk of having been improperly influenced” between January 2005 through 2010, the FSA, the British regulator, said Wednesday.

According to regulators, dozens of UBS employees, seeking to bolster their trading profits and to improve outside perceptions of the bank’s health, tried at least 2,000 times to manipulate a variety of benchmark interest rates, often with the knowledge or even encouragement of senior managers at the bank. The FSA called the efforts “routine and widespread.”

Traders dangled financial rewards, such as cash or favorable trading opportunities, to coax employees at other financial institutions to participate in the attempted manipulation. During one 18-month period, UBS was paying one firm of outside brokers £15,000 ($24,363) every three months to help the Swiss bank work with rival lenders to manipulate the rates. U.S. and British regulators called it clear evidence of collusion.

More bankers likely will be charged. British fraud authorities last week arrested three individuals, including Mr. Hayes, and are readying charges for next year against other people enmeshed in the case, according to people familiar with the case.

About a dozen banks remain under investigation, and a string of settlements is expected in coming months and years, along with more arrests, according to people close to the world-wide probe.

UBS acknowledged the regulators’ charges. “We are taking responsibility for what happened,” UBS Chief Executive Sergio Ermotti said in an interview. He said all employees with any connection to the scandal have left UBS, including 36 employees over the past year. As a result of the fine, the bank expects to report a loss for the fourth quarter of up to 2.5 billion Swiss francs ($2.7 billion).

Benchmarks like Libor and the euro interbank offered rate, or Euribor, are calculated every day based on estimates from banks about how much it would cost them to borrow money from other banks. The estimates are compiled into an average, with the highest and lowest bunches of estimates excluded.

Libor and Euribor are vital cogs in the global financial system. Interest rates on hundreds of trillions of dollars of loans and other financial contracts are pegged to the benchmarks. Central banks rely on them to help determine their monetary policies.

Banks have incentives to skew the rates. Investors closely scrutinize banks’ borrowing costs, and rising costs signal financial distress. UBS and Barclays have acknowledged submitting artificially low Libor readings in order to damp concerns about their health during the financial crisis. British regulators have recommended a variety of steps to overhaul how Libor is calculated.

Traders make bets on how rates will move, and millions of dollars in profits can rest on a tiny movement in Libor.

The bulk of UBS’s efforts were concentrated on the Japanese yen version of Libor. Mr. Hayes used a three-pronged strategy to make sure his bets on Yen Libor were profitable, regulators said.

He rigged UBS’s submissions to the panel that calculated the rate, colluded with traders at four other banks on that panel and bribed individuals at outside firms of brokers, regulators said.

The role played by these so-called interdealer brokers was crucial in helping the small band of traders rig a global interest rate, according to regulators. Banks use these brokers to help decide their Libor submissions.

One broker emailed how the honest banks on the panel were being guided to submit an artificially high rate, saying: “hopefully the sheep will just copy,” regulators said.

UBS tried to enlist employees at six brokerage firms to act as middlemen to coordinate the submissions of Libor data across multiple banks. Those firms include ICAP PLC, R P Martin Holdings Ltd., and Tullett Prebon PLC, according to a person familiar with the matter.

ICAP and R P Martin representatives declined to comment. Charlotte Kirkham, a Tullett spokeswoman, said that the firm didn’t help UBS manipulate rates and none of the broker’s employees have been disciplined in connection with Libor.